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Exam 5: How to Form a Business

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Question 61

True/False

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A franchise agreement is an arrangement where a franchisor sells the rights to a business name and the right to sell a product or service within a given territory to a franchisee.

A) True
B) False

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Question 62

Multiple Choice

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Your three friends from Wyoming inherited an old dude ranch. They now plan to turn it into a pasture for retired racehorses. Serenity Stables wants to open its doors by spring of 2020. After going to several small business seminars, your friends are certain they need limited liability. The high-risk, labor-intensive business will require a sizeable investment including an air-conditioned barn, several fenced-in pastures, and loads of animal feed. You explain to them that LLC ownership requires owners to pay self-employment taxes on the entire amount of earnings. You are fairly certain this is one tax liability your friends would like to avoid. You instead recommend

A) sole proprietorship.
B) general partnership.
C) limited liability company.
D) S corporation.

E) C) and D)
F) A) and B)

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Question 63

True/False

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Franchising in global markets has demonstrated that high operating costs are counterbalanced by high profit opportunities.

Peter recently invented a new workout program that uses indoor surfboards. His equipment can simulate surfing on waves and is a new favorite core workout in his community. As the founder of a fast growing business, you think his goal of incorporating, "to remain in steadfast control of the firm's operations for an indefinite number of years," is good strategy.

The limited liability provided to limited partners means that they are not responsible for the debts of the business beyond

In rural areas electrical power is often sold by ________ that take advantage of the government's policy to sell them electricity at wholesale rates.

Starting a new business as a sole proprietorship

Enok, a prospective franchise owner, is looking to keep his monthly costs as low as possible. The franchisor he is checking out is advertising that royalty payments of 8% of sales could be as high as $300,000 per month. The franchisor is claiming that a franchisee can expect monthly sales to be as high as

Setting up a partnership under the terms of a written agreement is a bad idea, because written agreements tend to be too inflexible and impersonal.

An owner of a corporation is known as a

A limited partnership refers to a partnership set up for a temporary purpose, such as a real estate development project.

Attracted to the idea of being his own boss, Christian wants to start a new business. He is confident in his abilities, and knows his potential market is strong, so he is not particularly worried about the financial risks. All of these factors suggest that Christian may favor starting his business as a sole proprietorship.

Farm cooperatives were originally established to help farmers increase their economic power by acting as a group rather than as individuals.

Your friend Bainbridge called to tell you he attended a pitch for a new franchise in website development. Bainbridge says, "We can get in for a few thousand dollars." He wants to know if you are ready to invest too. Although both of you lack expertise in graphic design or html programming, this should be a safe investment since it is already advertised as a franchise system. It's probably too good to pass up.

A general partner has unlimited liability for the debts of the partnership only if he or she personally approved the decisions that resulted in those debts.

In a leveraged buyout, the managers of a firm, its employees, or other investors

Jaheem owns a Far and Wide Travel Agency franchise. As a franchisee, Jaheem is guaranteed the right to retain all of his franchise's revenues and profits.

If a firm is advertising that it is selling franchise opportunities, the prospective franchisee can be assured that the government has performed due diligence on this company, and has deemed it a safe investment.

A limited liability company is similar to an S corporation, but without the special eligibility requirements.

The profits of a sole proprietorship are taxed as the personal income of the owner.